3 Ways the Insurance Industry Must Change to Survive

There's a lot of talk in the insurance industry about the next big thing: big data, artificial intelligence (AI) and predictive analytics to name a few. But one topic escapes most commentators' attention--the business model of the insurance industry. Put simply, it needs to change.

Yes, you read that right: The way the insurance industry makes money, profitable as it may be, must be altered to better serve consumers. Far from wishful thinking, this is absolutely necessary if the industry is to survive a coming onslaught from innovative companies trying to disrupt insurance. Upstarts are rethinking the insurance game from the ground up, and the industry needs to follow suit.

Here are the top three places they should start.

1. Transform the User Experience

The first change most insurers must make is to improve the user experience. Don't think user experience is part of your business model? Think again. Upstart companies are eating the industry's lunch, precisely because they provide a dead simple interface across devices that make it easy to learn about, compare and buy insurance.

And it doesn't stop there. Once insurance is purchased, the experience must remain exceptional. Policyholders want (and should be able) to manage their insurance from all providers with ease, across any device and in any place. Claims and customer service need to be Zappos-worthy. And consumer peace of mind must be the top priority of every user interaction.

Insurance knows how to make money. What it's struggling to do is delight and retain clients, even though consumers have few other options right now in the market. That will change as new companies reinvent insurance. Insurers have an advantage thanks to their infrastructure and clout, but they need to master the user experience if they want to future-proof their businesses.

2. Become Consumer Champions Again

The insurance user experience has suffered for many reasons, but primarily due to industry leaders having completely lost sight of their original reason for existing--to be consumer champions. Before the modern era, insurance providers and customers were far better aligned because the stakes were so high. For instance, a ship voyage was almost certain to encounter hardship--and everyone knew it. The parties involved created terms that were favorable to all, sealed with trust and a handshake.

Today, things have changed. The mutual gain aspect of insurance is largely gone.

The process is bogged down in legalese, exceptions and jargon that consumers don't understand. And it's never been harder to buy with confidence and a clear view of what your premiums are paying for.

In the past, insurance enabled risky ventures by providing reassurance and protection. These ventures were able to create massive gains for individuals and nations because of it. Today, few consumers look at insurance as an extremely valuable tool that works in their interests.

That needs to change. Without being true consumer champions, insurers will never recapture the trust and goodwill they've lost with many in the market.

Lemonade, a disruptive insurance startup with millions in funding, has identified a major roadblock in the traditional insurance business model: claims. Company cofounder, Shai Wininger, explains in this Medium post, "If we could figure out how to take away the underlying incentives that drive insurance companies to behave the way they do, we'd have a shot at profoundly changing how insurance works."

Part of that behavior is the tedious and lengthy claims process, which Lemonade says, some insurance players are incentivized to drag out, since they make more money when claims are not fulfilled.

To address the issue, "we only take a 20% flat fee off the top," Wininger says. "This way, regardless of the amount we pay out in claims, we end up with the same bottom line. This changes everything. Now, there's no more pressure to hold back on payments, and no incentives that work against our customers."

The result? Lemonade hopes to settle claims in seconds where possible, in a way that does right by consumers. The merits of Lemonade's model will be tested in the market, but there's a larger point here: industry giants need to begin thinking like startups. They must be brave enough to reinvent their business models in the ways detailed above.

If they don't, someone else will. And by the looks of it, it won't be an industry veteran.
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